Recent Posts

Warren Buffett is considered to be the
best fund manager ever. John Paulson doesn’t seem to think that
way. If John Paulson is right, he will be several times richer
than Warren Buffett by the time he’s 80 years
old. On several occasions, Warren Buffett complained about the
negative effects of managing dozens of billions of dollars on
portfolio performance. “The big minus is that our performance
advantage has shrunk dramatically as our size has grown, an
unpleasant trend that is certain to continue,“ Buffett said.

Warren Buffett also claimed that he would be
killing the Dow if he was managing only $10 Million with the
following words:

“If I was running $1 million today, or $10 million for that
matter, I’d be fully invested. Anyone who says that size does not hurt investment performance is
selling. The highest rates of return I’ve ever achieved were in
the 1950s. I killed the Dow. You ought to see the numbers. But I
was investing peanuts then. It’s a huge structural advantage not
to have a lot of money. I think I could make you 50% a year on $1
million. No, I know I could. I guarantee that.”

John Paulson disagrees. Questioned by
some of his investors about the effect of his portfolio’s large
size on his performance, John Paulson points out his outstanding
returns.

“In 2008, 2009, and 2010 our AUM has been approximately $30
billion and our returns were some of the best ever,” he said.
“Moreover, our size complements our skills by allowing us to
participate in and structure transactions beyond the reach of
smaller investment managers. First, in the bankruptcy area, we participated as the lead
or one of the lead investors in 10 of the top 14 bankruptcies.
Second, because of our size and expertise, we were invited by
numerous corporate management teams to provide capital on
favorable terms to repay debt, strengthen equity, and/or
restructure their balance sheets. As a result, we made many
attractive investments at attractive prices where we are now
positioned to realize the returns,” Paulson said.

“We are not concerned about our size for additional reasons.
First, we are currently fully invested in all our funds so we do
not have excess capital to make additional investments although
many attractive opportunitiesexist. Second, the
market opportunities are enormous in the areas in which we
participate. In the case of our largest and most profitable
position, Citigroup, market liquiditywould allow us to take a
position 6x to 7x our current size. Third, many of our funds are
relatively small.” Paulson added.

John Paulson thinks he can manage more money
without hurting his returns. He concluded with the following
remarks:

“It is the manager and the team that affect performance, not the
size of the fund or firm. We are not only one of the largest
investment firms, but also one of the best performing. Scores of
smaller funds have failed or delivered sub-par performance. We
think the most important criteria for selecting an investment
firm are the manager, team, and track record. We believe
the size is almost irrelevant to investment success. Our
size has certainly not diminished our enthusiasm for investing in
our funds, our ability to find or create opportunities, or our
performance outlook.”

Warren Buffett isn’t alone when
complaining about the negative effect of size on his
performance. It is true that when a fund’s AUM gets larger the
fund can no longer make meaningful investments in small or micro-cap stocks. However, it is also
true that having large resources at your disposal will provide
you many other opportunities that wouldn’t be available to
ordinary investors. Warren Buffett can’t
invest in small firms but he can invest in Goldman Sachs
(GS) or General Electric (GE) with terms so favorable
that he would come out ahead no matter what happens. Paulson has
the perfect answer for fund managers who complain about size: If you
can’t handle the money, give it to me. I can do it.